A variety of factors have been cited as contributing to the elevated level of base oil prices the past year and a half – cost of crude oil, the opportunity cost of making fuels, rebounding base oil demand. The outgoing chairman of Fuchs Petrolub AG recently added another trend to the list: the shrinking of the surplus of global base oil manufacturing capacity.
Manfred Fuchs told a conference in Dubai, United Arab Emirates, April 20 that the cushion between the volume of base oil that the world needs and the amount it is capable of producing has declined by nearly two thirds in the past three years. Fuchs, who turned over his chairmanship to his son Stefan earlier this year, suggested the trend has compromised the markets ability to cope with imbalances and disruptions. One industry consultant agreed with his conclusions while another disagreed.
Two key assumptions underlie Manfred Fuchs’ analysis, included inhis presentationto the ICIS-LOR Middle Eastern Base Oils and Lubricants Conference.The first assumption is to equate operating capacity to operating rate. That is,Fuchs assumed that base oil plants are putting out virtually as many barrels as they are practically able to produce. Consequently,he pegged global operating capacity in 2003 at 35.9 million metric tons. The second important premise is that lubricants worldwide have average virgin base oil content of 90.3 percent.
Working from these assumptions – andhis estimate that finished lubricant demand was 37.2 million tons last year – the Mannheim, Germany, based executive calculated that base oil operating capacity exceeded demand by just 2.2 million tons, or 6.2 percent. Fuchs said the surplus was down sharply from approximately 6.6 million tons in 2000.
The drop-off of the last few years, Fuchs said, has left the industry with a capacity cushion that is very little to deal with the various groups of conventional and unconventional base oils, as well as with local and viscosity imbalances, turnarounds and other disruptions.
While emphasizing that other factors also affect prices, Fuchs said the decrease in surplus capacity has changed the balance between supply and demand, and he suggested that the change in turn affects volatility of prices. As an example, he noted that the price of Group I solvent neutral 150 in northwest Europe climbed 27 percent in 2003 to $387 per ton. The price is now approaching $400 per ton, its highest level in years.
Two independent consultants, both of whom have just completed their own base oil studies, offered different takes on Fuchs analysis. David Whitby, of Pathmaster Marketing Ltd. in Surrey, U.K., agreed with Fuchs basic conclusion that the gap between the amount of base oil that suppliers are capable of producing and the volume that they actually make has been falling. Rather than trying to calculate surplus capacity, Pathmaster looks at variations in operating and utilization rates.
The steady decrease in total global nameplate capacity and the increases in operating and utilization rates means less flexibility to adjust supply to cope with unplanned shutdowns in older plants, Whitby told Lube Report. He added that the narrowing of this gap tends to keep base oil prices firm, although he identified crude costs and fuels demand as factors that drive up base oil prices. He also contended that base oil prices have become less volatile in recent years.
On the other hand, Steve Ames, of SBA Consulting LLC in Pepper Pike, Ohio, estimated that the worldwide surplus of base oil capacity was between 4.8 million tons and 5 million tons last year and that it has not fallen significantly in recent years.
I do not believe there has been any material change to the magnitude of the overall capacity surplus, Ames told Lube Report. He maintained that base oil has been more strongly affected by growing demand for advanced base oils, which he saw as leading to growing surpluses of heavy Group I neutrals and tightness for lighter grades of premium base stocks.